How Realtor Commission Changes Impact Buyers and Sellers

With commission practices upended, the race is on to see whether home sellers, buyers, or certain realtors benefit from the new cloak-and-dagger negotiation method.

Complaining about real estate agents and whether they earn their commission is standard–but so is hiring one to represent you. About 90% of homebuyers and sellers choose to work with an agent during their real estate transaction. One reason for complaints about real estate agents has always been the confusion over how they get paid. Some consumers assume a “standard” commission of 5% to 6% is mandatory. It’s not and has never been.

In 2023, home sellers brought a series of lawsuits against the National Association of Realtors (NAR) and several real estate brokerages. The sellers claimed that real estate industry practices kept agent commissions artificially high. NAR offered a nationwide settlement with $418 million in damages and a promise of changes.

The settlement, preliminarily approved by a judge and likely to receive final approval in November 2024, included two main adjustments to commission traditions that NAR implemented this summer.

Commissions are no longer advertised on Multiple Listing Services (MLS). While sellers can still offer to pay a buyer’s agent’s commission, that information must be privately offered rather than on the MLS or familiar sites such as Realtor.com and Zillow. Buyer agents now have to call/text the listing agent for each listing to determine if the seller is offering compensation for the brokerage bringing a buyer. Any compensation from the seller is now written into the sales contract, much like how commercial real estate is sold.

Second, buyers must sign a written buyer agency agreement with their agent that spells out how much the buyer’s agent will be paid for their services. Buyer agency agreements are already mandatory in 18 states, which include the District of Columbia, Maryland, and Virginia, and have been doing this for several decades.

The biggest impact of the settlement is greater transparency about commissions. Buyer’s agents will be forced to discuss their payment options with buyers in much greater detail than many have shared in the past.

The National Association of Realtors currently has 1.5 million members, plus additional agents who don’t belong to the association. Some industry insiders expect that number to drop by as much as one-third as commission competition heats up. It’s interesting to note that over half of these 1.5 million members have never collected a commission check.

Other effects are debatable. Many real estate industry insiders predict little change. Other groups believe that commissions will decline and home prices will follow. However, sellers are unlikely to drop prices, especially in a competitive market.

Potential Impacts for Home Buyers

A variety of scenarios will be possible for buyers as common practices change, including:

  • Buyers may pay their agents directly out of pocket rather than at the settlement.
  • Buyers may negotiate with their agents to pay a commission based on a percentage of the sales price, a flat fee for all services, individual fees for specific services or an hourly rate.
  • Buyers can negotiate payment of their agent’s commission with sellers as part of their purchase agreement.
  • Buyers can request seller concessions as a lump sum at settlement for closing costs and use some or all of it to pay their agent.
  • Buyers may skip having an agent represent their interests.

Currently, buyers can’t finance their agent’s commission into their loan, which places a burden on them to come up with cash if they can’t get the sellers to kick in for the fee. Some real estate industry experts are concerned that this will hurt first-time buyers and buyers with low to moderate incomes who already struggle to accumulate the cash for a down payment and closing costs. Luxury buyers and move-up buyers are more likely to have the funds available to pay an agent should a seller not offer any compensation.

Under the VA loan program’s rules, homebuyers who finance their purchase with a VA loan are not allowed to pay a real estate agent commission. If sellers don’t offer to pay the buyer’s agent, VA borrowers may not have representation unless the VA program changes its rules.

Consumer advocates such as the Consumer Federation of America (CFA) anticipate that real estate leaders will push Fannie Mae, Freddie Mac, and federal housing agencies like FHA to allow buyers to finance their agent’s commissions into their mortgage.

Potential Impacts for Sellers

The common practice has been that the seller and listing agent agree in writing on compensation to a buyer’s agent. This compensation was listed in the MLS with the property. The new practice eliminates all commission information from MLS listings. Sellers will choose what they are willing to pay, if anything, based on current market conditions, the price of the home, and the projected number of interested buyers.

Sometimes, a listing agent will suggest that the seller offer to pay the buyer’s agent commission as part of the negotiation. In a strong seller’s market, homeowners may be more likely to insist that buyers pay for their agent’s services. In a buyer’s market, when sellers have more competition to sell their home and fewer offers, sellers may decide to offer to cover those costs to sweeten the deal for buyers.

Who Benefits? Competing Reports

According to a report from the CFA, Why Commission Uncoupling Will Help First-Time Home Buyers (As Well As All Other Buyers and All Sellers), both buyers and sellers are likely to benefit from uncoupled commissions. The CFA expects commissions to decline by 20% to 30% overall, although some experts in their report believe commissions could drop by as much as 50%.

In addition to the direct savings on commissions, some industry analysts expect listing prices to decline because sellers won’t need to bake in commission payments to the price.

However, research by Bright MLS, an MLS that serves the Mid-Atlantic region, found that commissions don’t drive home prices. Instead, home prices adjust based on property and neighborhood characteristics, mortgage rates, and other economic factors.

It’s important to note that these changes won’t happen overnight. The real estate market is complex and shifts in commission structures will likely occur gradually as new regulations take effect and as market participants adjust to the new norms. The bottom line is that everything in your real estate transaction is negotiable (and has always been), including hiring a real estate agent, how much they do for you, and how they get paid.

SOURCE: Article excerpts from - https://www.greenbuildermedia.com/blog/how-realtor-commission-changes-impact-buyers-and-sellers

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Navigate real estate transactions confidently despite a potential shift on market regulations and norms with a trusted real estate agent. Should you require help with real estate needs, feel free to contact me via phone at 703-646-1750 or email me at janet@simplyyourbestmove.com